Financial rules kill competition

Since the global financial crisis, regulators have focused on shoring up the financial system and minimising mis-selling of complex consumer products. This is understandable given the causes of the GFC and the limits of self-regulation.

There is nevertheless a risk that emboldened regulatory activism results in Australia’s financial system, which is riddled with taxpayer subsidies and concentrated by global standards, becoming even less competitive. The concern is that consumer choice, market efficiency, innovation and equality of competitive opportunity are undermined at the altar of “financial stability”.

Indeed, regulation by the Australian Securities and Investments Commission, the Australian Prudential Regulation Authority, and the Reserve Bank of Australia could perversely reinforce local “too-big-to-fail” dysfunctions that propagated the original moral hazards in the US. A potential solution is to explicitly require ASIC and the RBA, which is responsible for financial system stability, to consider the competitive costs of all new regulation as part of their policy development.

APRA has similar obligations embedded in its enabling legislation, although it is questionable whether it pays much attention to them. ASIC and the RBA have historically displayed little interest in promoting choice.

Overarching responsibility for national competition policy rests with the Australian Competition and Consumer Commission. Yet the ACCC spends most of its time enforcing compliance with the law. It is hard for the ACCC to foster competition in specific industries.

Former ACCC commissioner Stephen King says: “There’s been a significant departure from the motivating idea behind national competition policy, which is that you only introduce new rules if the benefits outweigh the competitive costs.

“In practice, this rarely occurs. Regulatory impact statements are not worth the paper they’re written on.”

When regulators like ASIC and the RBA are allowed to neglect choice and efficiency considerations, cultural dysfunctions invariably emerge.

One example is the favoured RBA canon that there is a trade-off between competition and financial stability. This ruse has been run by politicians on numerous occasions. The RBA’s argument has been that Australia’s banking system is very competitive, and that new entrants would reduce the majors’ profit margins, motivate them to relax credit standards, and introduce riskier products.

This is why the RBA has doggedly defended, to the surprise of some, the majors’ competitive qualities at countless public inquiries. It is also why they have instinctively opposed measures to stimulate further competition, such as liquidity support for securitisation during the GFC.

And it is why puzzling disconnects have emerged with the national competition watchdog. In February, the ACCC’s chairman, Rod Sims, contradicted RBA claims, opining, “the banking sector seems to need more [competition] because even though there are four of them there is a lack of full and effective competition. I think the four feel they are protected from others entering the market and that makes for arrangements that are too cosy for consumers.”

The truth is that Australia’s financial system would be safer and more stable with, say, eight medium-sized banks, which were individually non-essential to the overall economy, than the four too-big-to-fail behemoths we have today.

Despite our small population, the majors have a combined market capitalisation of over $300 billion, and rank among the 20 largest banks in the world. CBA is bigger than American Express and McDonald’s, and almost the same size as Citigroup. And the majors’ too-big-to-fail features bequeath tremendous comparative advantages. In banking, he with the lowest cost of funding wins via higher profits, greater market share, or both. Standard & Poor’s lifts the majors’ credit ratings two notches higher purely because it believes taxpayers will bail them out during a crisis. No other Australian deposit-taker gets this rating relief.

After exhaustive reviews of what went wrong before 2007, UK experts decided their financial regulator needs an explicit competition objective. The UK government is giving the new Financial Conduct Authority “a formal and wide-ranging mandate to place competition at the heart of the new conduct regime”. Forcing ASIC and the RBA to examine the competitive costs of all new rules is likely to lead to more balanced bureaucracies and better policy outcomes.

Christopher Joye is an economist, policy adviser and fund manager.

The Australian Financial Review

BY Christopher Joye

Christopher Joye is a contributing editor to The Australian Financial Review. He is a leading economist, fund manager and policy adviser who has previously worked for Goldman Sachs and the RBA, and was a director of the Menzies Research Centre. He is currently a director of Smarter Money Investments.

BY Christopher Joye

Christopher Joye is a contributing editor to The Australian Financial Review. He is a leading economist, fund manager and policy adviser who has previously worked for Goldman Sachs and the RBA, and was a director of the Menzies Research Centre. He is currently a director of Smarter Money Investments.